Market Snap: At the New York close: S&P 500 down 0.5% at 2107.78. DJIA down 0.5% at 18203.37. Nasdaq Comp down 0.6% at 4979.90. Treasury yields rose; 10-year at 2.122%. Nymex crude oil up 1.9% at $50.52. Gold down 0.3% at $1,204.00/ounce.

How We Got Here: Well, at least the bubble talk will die down for a day.

U.S. stocks fell on Tuesday, dragging the Nasdaq Composite back below the 5000 level it hit on Monday. There wasn’t any direct cause.

The market’s straight line higher from the January lows has gotten noticeably more crooked lately. It’s close to horizontal, in fact. The S&P 500 is down four of the past five sessions. Earnings season is over, the economic data has been weak, and there are still questions about exactly what kind of deal Greece got, or if it’s going to get any money after all.

The lure of Nasdaq 5000 goes only so far.

Coming Up: China on Wednesday will release its Markit-HSBC February services PMI data. January’s index reading of 51.8 marked a five-month low and helped build a picture of a deeper Chinese slowdown. With the latest manufacturing data stabilizing but showing no sign of a solid expansion, any further disappointments in this non-manufacturing indicator will only exacerbate such concerns.

What You Missed Overnight

U.S. Stocks Trade LowerU.S. stocks retreated Tuesday, a day after the Nasdaq Composite rose above 5000 for the first time in nearly 15 years.

Netanyahu’s Bet: Congress Will Emerge Dominant in Iran DebateBenjamin Netanyahu’s bet is he can circumvent the White House and enlist Congress to either sink President Obama’s Iran diplomacy, or at least significantly toughen and broaden the terms of any deal. But the sharp public upbraiding of the president’s signature foreign-policy initiative also carries tremendous risks for the Israeli leader.

From The Wall Street Journal

Exchanges in Asia Seek to Counter China Stock Tie-UpExchanges in Japan, Singapore and Taiwan are exploring new connections in an effort to drive up volumes, a few months after the coupling of the Shanghai and Hong Kong stock exchanges claimed the top spot as Asia’s biggest single market.

Beijing Reopens Old Land Routes In November, a freight train rumbled out of Yiwu, China, bound for Madrid, inaugurating the world’s longest rail link, an 8,000-mile journey along the ancient Silk Road through Central Asia. It is part of one of the most ambitious transport and infrastructure projects in history.

From MoneyBeat

Do You Have What It Takes to Be a Master of Math?Once a year, some of the top minds in the secretive world of quantitative investing get together for a casual but intensely competitive math competition. Hosted by the National Museum of Mathematics, the Masters Tournament is both a fund-raising event and the closest thing the “quants” have to a brain showdown.

Treasury Arm Questions Fed ‘Stress Tests’Two days before the Federal Reserve releases the first round of its 2015 “stress tests” another government agency is questioning the way the annual exercises are run.

Could Apple Prove a Game-Changer for Gold?Apple plans to make an 18-karat gold encased version of its new watch, and thinks it can sell 1 million of these gilded watches every month. Now, the internet is trying to calculate how much gold Apple will have to buy for the new watches.

Happier times: A woman walks past the Nasdaq sign in New York’s Times Square March 9, 2000.

Getty Images

I, for one, miss the sock puppet. I miss the truck driver who claimed he bought an island by trading stocks online. I miss the day Cisco Systems became the world’s most valuable company even though people weren’t sure what it did. I miss Time-Warner selling itself to AOL. I miss the bubble.

Or more precisely, I miss what the bubble represented. I don’t miss the destruction of wealth when the Nasdaq bubble burst. (And it was obvious it was a bubble to most everyone, though no one knew when, or why, it would pop.) But like most bubbles, the Nasdaq bubble was rooted in something real: the technology and the Internet were changing everything. People really believed there was a new economy.

The Nasdaq 15 years later is once again at 5000 and it’s no longer a bubble. It traded at an insane 132 times earnings then, versus a merely rich 32 times earnings now. (And with bond yields at 2% instead of 5%, high valuations are more supportable now.) These days, “new economy” evokes dystopian rumblings of stagnant wages and wealth inequality.

Nasdaq’s biggest company then, Cisco, traded at 135 times earnings and had just $19 billion of revenue. Its biggest company now, Apple, trades at 17 times earnings and has $182 billion of revenue. As Dan Gallagherwrites in today’s Heard on the Street, “Tech is pretty humdrum.”

Aswath Damodaran, who teaches at New York University and blogs at Musings on Markets, notes that tech went from 6% of total stock market capitalization in 1990 to 29% at the peak of the Nasdaq bubble, and has held steady at 20% since 2009. “Technology is now the largest single slice of the equity market,” he write. “Just as growth becomes more difficult for a company as it gets larger and becomes a larger part of the economy, technology collectively is running into a scaling problem, where its growth rate is converging on the growth rate for the economy.”

Tech today is relatively mature. Just 13% of tech companies are under 10 years old; 41% are 25 or more years old. Says Mr. Damodaran: “While being in existence more than 25 years may sound unexceptional, given that there are manufacturing and consumer product companies that have been around a century or longer, tech companies age in dog years, as the life cycles tend to be more intense and compressed. Put differently, IBM may not be as old as Coca Cola in calendar time but it is a corporate Methuselah, in tech years.”

These oldsters, he finds, actually trade at cheaper valuations than similarly aged non-tech companies, and are returning more cash to shareholders in the form of dividends and buybacks. Tech’s youngsters are actually growing more slowly than their non-tech peers. This is all evidence of a mature and sensible market, but also a less optimistic one.

All five of the largest Nasdaq companies in 2000 were mainly business-facing companies while four of the five largest today are consumer facing companies. Apple and Facebook are producing genuine benefits for consumers around the world, but they are not revolutionizing business and life the way the innovations of the first Internet bubble did.

The first Internet boom really did supercharge economic growth. From early 1997 through mid-2004, productivity grew at an astonishing 3.5% per year. Since 2009 it has averaged 1.4%. To be sure, many of the benefits of the consumer Internet today are not captured in productivity or GDP, such as the hours spent on social media or the ease of looking up information on the Web. But those advances are incremental and would not have been possible without the more sweeping innovations of two decades earlier. This Nasdaq 5000 would not have been possible without the first Nasdaq 5000.

Of course, advances in robots, machine learning and social media may one day revolutionize the economy. Today, techno-optimists and techno-pessimists are arguing passionately precisely over this question.

On the first trading day after the private-equity firm disclosed late Friday that its co-founder pocketed about $690 million in 2014, Blackstone’s stock set a record close of $38.14. At that price, Mr. Schwarzman’s roughly 20% stake in the firm he launched in 1985 is worth more than $8.8 billion. Tuesday, after hitting an intraday record in early trading, shares closed down slightly.

Speaking at a Wall Street Journal event early Tuesday Mr. Schwarzman said it’s unfair to compare his payout — mostly dividends paid on his Blackstone shares — to that of bank chiefs whose yearly pay amounts to what he brings home in just days.

“It’s not that different if you were a Steve Jobs starting his company versus a Tim Cook, who is working there,” Mr. Schwarzman, 68, said, referring to the late co-founder and current CEO of Apple Inc., respectively. “It’s because you start a company and you own stock and you’d make that whether you worked or you didn’t work.”

(See WSJ’s tally of the payouts Mr. Schwarzman and other buyout barons.)

Indeed, had Mr. Schwarzman spent 2014 sunning on a beach rather than running the firm from its Park Avenue offices or globetrotting to meet with its investors, he would have collected all but 0.06% of last year’s take home. That sliver of compensation is comprised of a $350,000 salary and about $89,000 paid by the firm for his personal security.

The great wealth he’s accumulated has prompted “an interesting existential question” about what to do with the mountain of money, said Mr. Schwarzman, who already has his name on the New York Public Library’s iconic Fifth Avenue building after pledging $100 million in 2008. In 2013 he endowed a scholarship program China with another $100 million.

“You actually have to give away a vast amount of money over time,” he said. “That will be an interesting next phase in my life; I’m already doing that, I just have to accelerate that.”

Mr. Schwarzman also shed light on what it takes to join the world’s largest private-equity firm. He said in prospective hires he looks for qualities including adaptability, flexibility in thinking, perseverance and grit. Another must: a Blackstone employee must be pleasant.

“To be hired at our place and to work with us you have to be nice,” he said. “To maintain a culture of very smart, fast-moving people you can’t have political monkey business going on. You have to have nice people, you have to have a meritocracy culture, you have to have everybody believe because it’s true.”

Two days before the Federal Reserve releases the first round of its 2015 “stress tests” another government agency is questioning the way the annual exercises are run.

The Office of Financial Research, a new arm of the Treasury Department created under the 2010 Dodd-Frank law, posted a working paper Tuesday studying whether the Fed’s tests have become too predictable. The tests assess big banks’ ability to survive a recession and keep lending, but they may be too similar from year to year and therefore less useful in preparing for an unexpected shock, the paper suggests.

“Whereas the results of stress tests may be predictable, the results of actual shocks to the financial system are not, and herein lies the concern,” write the authors, Paul Glasserman and Gowtham Tangirala. “The process of maturation that makes stress test results more predictable may also make the stress tests less effective.”

Read the full OFR paper here. The paper focuses on the “quantitative” results of the tests, which look at bank losses and capital levels, rather than on “qualitative” issues such as whether banks are properly managing risks. The Fed test examines both but, in recent years, the qualitative side of the Fed’s annual tests have been what has gotten some banks in trouble. Last year the Fed failed Citigroup, Inc., rejecting its request to return capital to shareholders over qualitative shortcomings.

The OFR – a relatively new agency that has struggled to find its footing – is questioning the Fed right before the central bank’s main regulatory event of the year. The new research agency was conceived by the authors of Dodd-Frank as sort of a government “think tank” on risks to the financial system, and it wants to assert itself as an independent and influential voice on policy matters.

DBRS Ltd. will grow its presence in Europe, once the Canadian ratings firm’s purchase by private-equity giants Carlyle Group LP and Warburg Pincus LLC closes this week, The Wall Street Journal has reported. The planned move would follow a similar expansion by another upstart, Arc Ratings S.A., a London-based firm with partners in three continents.

And there’s at least one more player eyeing a move into Europe: Kroll Bond Rating Agency Inc.

Kroll plans to open a London office and staff it with six to eight analysts, beginning as early as mid-summer of this year, said Kate Kennedy, the New York-based firm’s head of investor relations. Kroll, started four years ago by corporate investigator Jules Kroll, has initially focused its efforts on the U.S. market.

Kroll will initially focus on rating structured finance, financial institution and corporate deals in Europe, Ms. Kennedy said.
While there several dozen ratings agencies spread across Europe, the big players dominating the U.S. market are also mainstays in the Eurozone: Standard & Poor’s Ratings Services, Moody’s Investors Service and Fitch Ratings have more than 95% of the market.

But upstart firms believe the big three firms are less entrenched in Europe and feel there could be a fairer fight, they say. The nascent players are also bullish on Europe due to a new regulation encouraging the use of smaller firms, or those with 10% or market share or less.

But the big three firms won’t go down without a fight, since Europe represents an important market for them, too. One driver: Eurozone banks are peeling back lending to companies, spurring the region’s companies to turn to the debt markets to raise funds.
That trend amounts to a major growth opportunity for ratings agencies, which are paid by debt issuers to evaluate the default risk of bond deals.

In contrast with the U.S., where banks control about 20% to 25% of the corporate-debt issuance world, European banks still represent about three-quarters of the market, said Douglas Peterson, the chief executive of McGraw Hill Financial Inc., the parent firm of S&P, at an investor conference on Monday.

“As Europe shifts away from being driven heavily by banking markets, they are shifting to capital markets, which has been a beneficiary to the rating agencies,” Mr. Peterson said.

DBRS Chief Executive Daniel Curry told the Journal being a Toronto-based firm could be a benefit in Europe. “Coming in as a Canadian firm gives us an advantage in that we’re not perceived as another U.S. ratings agency,” Mr. Curry said.

Crossing Our Desk:

–Researchers at the European Central Bank, recognizing the explosion of “altcoins” since their last comprehensive study of digital currencies in 2012, have updated that report with a follow-up. Other than conveying a kind of legitimacy to bitcoin by the mere fact of conducting the study, the group didn’t exactly come up with a ringing endorsement.

The report’s conclusion: bitcoin and other “virtual currency schemes” – or VCS, as the ECB prefers to describe this currency-technology combination – still aren’t really big enough to matter to the eurozone economy right now. But if future iterations overcome some of the flaws, the report’s authors add, these “inherently unstable” payment tools might pose challenges to monetary authorities and so warrant continued examination.

“Conceptually,” the report concluded, “VCS could jeopardise financial stability.” But it added that they currently pose no such threat, “given their limited connection to the real economy,… the low volumes traded and the lack of wide user acceptance.”

Although it acknowledged that digital currency technology has some potential advantages for consumers and merchants, overall the report read like a fairly comprehensive dissing. The ECB dwelled more on the risks and limitations of digital currencies than anything else. Its choice of nomenclature – emphasizing the “virtual” nature of these units – reflected the ECB’s prevailing view that they don’t actually constitute money or currencies in accordance with any economic or legal definition.

Perhaps most striking was the narrow purview of the research, which avoided addressing much of the past year’s innovation in the digital currency sector. Although it contained geeky comparisons of “proof of work” versus “proof of stake” mining software programs, the two main competing validating systems for digital currency computer networks, there was close to zero discussion of the many non-currency uses for blockchain technology now being developed.

Not only were these various “Bitcoin 2.0” applications ignored, the report hardly addressed the notion, widely discussed in both crytpocurrency and financial circles, that digital currencies could play a back-office role in the financial system even if they are shunned by mainstream consumers and businesses.

And while the ECB researchers discussed at length the critical problems of bitcoin’s exchange-rate volatility and insecurity, they overlooked advances aimed at addressing these shortcomings. No mention was made of reserve-backed pegged crytpocurrencies, “multsignature” password systems for protecting digital wallets, or the provision of “digital vault” custodial services that come with insurance from A-rated underwriters.

]]>http://blogs.wsj.com/moneybeat/2015/03/03/bitbeat-new-ecb-report-is-largely-dismissive-of-bitcoin/feed/0New Fan for Lumber Liquidatorshttp://blogs.wsj.com/moneybeat/2015/03/03/new-fan-for-lumber-liquidators/?mod=WSJBlog
http://blogs.wsj.com/moneybeat/2015/03/03/new-fan-for-lumber-liquidators/#commentsTue, 03 Mar 2015 19:47:44 +0000Kevin Kingsburyhttp://blogs.wsj.com/moneybeat/?p=33924Janney Montgomery has been sitting on the fence on Lumber Liquidators Holdings Corp. since 2012 with its neutral rating.

No longer.

In the wake of shares slumping nearly 45% within the past week between a downbeat fourth-quarter report and Sunday’s “60 Minutes” piece, the investment bank moves to buy on the flooring retailer while keeping its fair-value estimate at $46.

Among other things, “60 Minutes” alleged laminate-flooring material sold by Lumber Liquidators and made in China doesn’t meet Californian emissions standards on levels of formaldehyde, a known carcinogen.

In a statement to the “60 Minutes” allegations, Lumber Liquidators said:

We comply with applicable regulations set by the California Air Resources Board (“CARB”), which is currently the only regulator of composite core emissions. Although the CARB regulations only apply in California, we adhere to these standards everywhere we do business. Every manufacturer of fiberboard cores used in our products is certified in accordance with CARB regulations. We have documentation to support each step of our production process, including vendor agreements, vendor invoices, CARB certificates, and test results, to serve as further proof that our processes, practices and products are compliant across the board.

Janney, for its part, is “satisfied” that Lumber Liquidators’ product meets California standards. It thinks the program “did not provide a complete picture of the issue. It didn’t highlight victims, had no feedback from regulators and relied on anonymous Chinese factory workers making accusatory statements.”

It also believes that the company potentially doing what is alleged, risking “everything for what would have been a few million dollars in annual savings…just makes no sense.” In all, fears are “overblown” about the stock, says Janney.

No matter how they’re doing, retailers are going to say their future isn’t in doubt. Best Buy is putting its money where its mouth is.

Reporting quarterly results Tuesday, the big-box consumer electronics seller said it would buy back shares for the first time since 2012, that it was upping its quarterly dividend by 21% and that it will also pay a special dividend of 51 cents a share. All in, Best Buy looks like it will return over $800 million to shareholders over the next year, according to Evercore ISI.

That is quite a shift. Consider that a couple of years ago, Best Buy was deeply troubled, with online sellers bleeding away market share and cluttered stores turning off customers. And when it comes to payouts, investors may remember how many companies were busily returning cash to shareholders prior to the recession, only to find it was needed desperately once the downturn hit.

On that score, Best Buy looks able to afford its latest proposal: It finished the year with $2.3 billion in net cash, about $1 billion more than a year before. It has more work to do. But Tuesday’s announcement suggests it is confident it has turned the corner.

]]>http://blogs.wsj.com/moneybeat/2015/03/03/best-buy-sends-a-message/feed/0Pharming for Yieldhttp://blogs.wsj.com/moneybeat/2015/03/03/pharming-for-yield/?mod=WSJBlog
http://blogs.wsj.com/moneybeat/2015/03/03/pharming-for-yield/#commentsTue, 03 Mar 2015 17:56:55 +0000Charley Granthttp://blogs.wsj.com/moneybeat/?p=33919Actavis’ bond sale shows the hunger for yield is still strong. But investors ought to look to both sides of the corporate capital structure.

The generic pharmaceutical maker on Tuesday closed a $21 billion debt deal. Proceeds will be used to finance the cash portion of its acquisition of Allergan, announced in November. Investors starved for fresh investment-grade debt were eager for a piece: orders reportedly exceeded $90 billion.

But in this interest-rate environment, income doesn’t just have to come from bonds. While Actavis doesn’t pay a dividend and Allergan’s payout is miniscule, there are five U.S. pharma majors—Abbvie, Bristol-Myers Squibb, Eli Lilly, Merck and Pfizer—that offer an average dividend yield of just under 3%. That is roughly 0.9 percentage points higher than what the 10-year Treasury offers, and about matches the yield of the five-year, fixed-rate tranche offered in Tuesday’s Actavis deal.

Stocks and bonds alike can experience capital losses, of course. But nowadays, investors searching for income have to consider all their options.

Now, the internet is trying to calculate how much gold Apple will have to buy for the new watches, with some commentators speculating they could contain up to 2 troy ounces of gold per watch. If that’s the case, Apple would have to buy 750 tons of gold per year to produce 1 million watches a month.

That would take a huge bite out of global supply—the total amount of gold mined globally each year hovers around 3,000 tons, making the amount of gold in circulation roughly 4,000 tons.

Apple buying such large amounts of the yellow metal “would be a ‘game changer’ for the gold market,” said Jonathan Williams, a corporate broker at RFC Ambrian, in a research note.

However, the actual amount of gold used in Apple’s new watches could be much lower. Each watch may contain less than half a troy ounce of gold, says Mr. Williams. At around 50,000 units a month, which one analyst think its a more realistic sale figure, that would mean Apple would have to buy about 9 tons of gold a year.

This post was updated at 1:19 p.m. ET with an analyst’s estimate that 50,000 units per month is a more realistic sales figure.